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July 10, 2013

Gundlach: What’s Inflation Got to Do With Recent Volatility? Nothing

DoubleLine’s rogue bond king on why he’s not worried about inflation and what asset he’d pick as a contrarian play

In a webcast on June 27, Jeffrey Gundlach, CEO of DoubleLine Funds, picked up where an earlier webcast left off asking, “What in the world is going on?” Gundlach referred to the 10% intraday drop in the Nikkei on May 22 saying that since then, “something seemed to have changed.”

Gundlach said the sell-off in stocks and bonds globally has had “nothing to do with inflation.” Despite some volatility through the credit crisis, the consumer price index is at a low point, according to Gundlach. “A lot of people think the CPI is a bunch of hooey and it’s just being manipulated by the government,” he said, referring then to the personal consumption expenditures index, “a measure the Fed likes to look at.” The PCE is also on a low that goes all the way back to the ‘60s, he said. “There’s no message of inflation in the market.”

Also not showing signs of inflation is gold, Gundlach continued. In late June, gold fell to nearly $1,200 and rose only slightly on Wednesday. “The momentum in gold is incredibly high on the downside,” Gundlach said.

Commodities, while low, are “eerily stable,” Gundlach said, noting that since April, virtually every commodity is down.

The S&P 500 has increased dramatically compared with the MSCI Emerging Markets Index. “There has been enormous outperformance of the S&P 500 and that has accelerated since the middle of May, so emerging-market equities are extraordinarily weak,” Gundlach said. He suggested this was the cause of investors’ nervousness. “They are not only losing money in things like Treasury bonds and the S&P 500, but they’re getting crushed in other markets.”

However, Gundlach added that this was likely a short-term correction and that emerging markets would likely improve in the coming weeks. “If I was going to make a contrarian play,” he said, “I wouldn’t use gold, I’d use emerging-market equities compared to the S&P 500.”

Gundlach was skeptical about growth opportunities in China, noting that performance on the Shanghai index is not in line with China’s claims of growth above 7%. Furthermore, he said, the interbank borrowing rate spiked in June to nearly 14% from a range of 2% to 4% last year. “It’s indicative of a world in China where banks don’t feel comfortable lending to each other, which is indicative of financial trouble,” he said. The rate is back down, he acknowledged, but is still uncomfortably high at nearly 6%.

Gundlach said he expects July will be a better month for investors than June was. “I think we’ll have increased stability in the markets during July, thanks to reversals we’ve seen in the last few days. Things don’t just continue on in that frenzied state.”